Business Analysis: William Hill ready to try its luck with the purchase of Stanley's shops

William Hill is gearing up to pay more than £500m for Stanley Leisure's betting shops - a deal that would make it the largest chain in the UK.

But with the advent of the internet, which is taking betting into a high-tech age, accessible from every home and workplace, betting shops increasingly appear to be a relic of a bygone era.

Dingy, smoke-filled dens littered with torn betting slips and broken dreams, where whippets and women are left at the door, betting shops seem like the outdated, parochial face of what is fast becoming a multibillion-dollar global gaming industry. Why is William Hill prepared to pay as much as 12 times earnings, as some estimates suggest, for Stanley's 600-strong betting shop estate?

"Two questions arise - is it the right strategy and is it the right price?," says Nigel Parson of Williams de Broë. "On the strategy front, it makes perfect sense as Stanley's estate is concentrated in the North-West, while most of William Hill's shops are in the South. On price - well that is not as straightforward, although William Hill should be able to make large cost synergies and the deal also removes a competitor."

But shares in William Hill fell nearly 3 per cent yesterday after shareholders were told that the £450m of cash they were promised in March is now being kept in the coffers for the potential acquisition. William Hill had said it would return cash it had been holding back for possible casino developments, had the Gambling Bill opened the doors to new competition. But last-minute changes to the law mean the threat of new gambling outlets has been much reduced, and William Hill said it no longer needed the cash.

The stakes are high, then, for William Hill. If the deal goes through, it will have to deliver significant revenue boosts to make it worth the gamble with the affections of its investors.

Some experts believe this will be difficult, given that Stanley's estate is somewhat down-at-heel and has had years of underinvestment. According to Seymour Pierce estimates, Stanley shops lag William Hill shops in gross win terms by 26 per cent, and the average profits generated at each Stanley shop are more than 60 per cent below those at William Hill. With a price tag of more than £500m, Paul Leyland of Seymour Pierce, fears William Hill is overpaying.

He said: "In short, William Hill is acquiring an estate of lower quality at a premium valuation." He calculates that William Hill could open new shops of its own for less than half the cost it may pay for Stanley's. "Naturally, this takes a lot longer, but we believe the 160 per cent premium is a little steep, particularly given the lower quality."

But even with this mooted price of £500m, it is by no means a one-horse race for Stanley's betting assets. Coral, the third-largest bookmaker, was talking up its form on the acquisition front, saying it had not been beaten by William Hill in a competitive auction for a betting shop yet. A spokesman for Coral said: "We are keeping our options open. There are uncertainties surrounding these talks [between William Hill and Stanley] on both price and execution."

As well as Coral, the Tote, the pooled betting service, is also a keen participant. A spokesman for the Tote said: "We would be very interested in getting involved in the purchase process of the Stanley shops if the opportunity were to arise."

Only Ladbrokes, the UK's biggest betting chain and part of the Hilton Group, appears to be a non-runner. "We have a more selective approach to acquisitions. We have very clear specifications on the quality and location of what we buy," a spokesman said.

Excluding Ladbrokes, why are betting shops in such demand? The reality is that internet and telephone betting, although growing strongly, are still tiny fractions of business for even the biggest betting chains. Betting shops are still at the heart of their businesses, and companies are spending millions on making them more welcoming. Flat-screen televisions and cappuccinos, for example, deck modern betting shops to create a café-style atmosphere.

The real jackpots for high-street betting operators, however, come in the form of sophisticated fruit machines that display computer-generated roulette wheels and horse racing. These machines, known as fixed-odds betting terminals (FOBTs), have proved phenomenally successful and have become cash cows for bookies.

The extent to which bookies now rely on FOBTs was in evidence at Stanley's interim results. Its betting-shop division saw profits dive 69 per cent as a result of a run of winning favourites, particularly in football. But with the addition of its roulette machines, the drop in profits at its retail outlets was only 6 per cent. More than one- third of William Hill's revenues comes from FOBTs.

The new Gambling Act enshrines in law permission for bookies to continue creaming in profits from these machines. It is now in statute that bookies can have four machines per shop, removing much uncertainty on the legality of the machines for bookmakers.

Stanley has been slower than most in getting the machines installed. It has only about two per shop. A buyer will be quick to increase this and enjoy the additional revenues.

The field is still wide open for Stanley's betting shops. As for Stanley, a sale would be a good result. Proposals to allow sports betting and casino gaming in the same premises were dropped from the Gambling Bill, so there is now little opportunity for Stanley to exploit its dual interests. As a pure casino it lacks scale, but the Malaysian gaming operator, Genting, has been building stakes in Stanley and its main casino rival, London Clubs International, for some time. Lord Steinberg, who is now a non-executive chairman of Stanley, is no longer the largest shareholder, and a takeover of Stanley's betting shops should pave the way for a merger of the two casino groups.